Article 9, Day 5 GBP USD – How to Trade GBP USD Wisely and Properly December 14th, 2012 by Chris Pottorff | Category: Basics GBP – the British Pound is amongst the oldest currencies in circulation on date. The current currency code is denoted by GBP. The currency is also recognized by other names such as Sterling, British Pound Sterling and Pound Sterling. GBP is the official currency, circulating tender or mode of monetary exchange in areas like England, Scotland, Wales and Northern Ireland etc which form the Great Britain. The official symbol for British Pound is “£”. The GBP equals 100 pence. British Pound is included in the category of `major currencies’ of world. Other major currencies belonging to the same category include dollar of the United States, Euro belonging to European side and Japanese Yen. GBP prides itself on bearing the highest worth amongst all the major currencies units of the world. It’s been often observed that people get confused and go to treat Scottish pounds as a separate currency where as the truth is that British & Scottish pounds are absolutely interchangeable, value of both these is equal and both are officially accepted all through the Great Britain. It wouldn’t therefore be incorrect to state that British & Scottish pounds are the same. Let us understand what makes GBP such a highly popular currency. The first reason lies in its location. London, which happens to be amongst the busiest and largest trading centres worldwide uses GBP as its official currency. This fact makes GBP a highly traded currency, sharing 3rd position with Japan’s currency, Yen. Second USP of this currency lies in the kind of rate system that it uses. GBP uses Floating rates, which makes it rather easy for traders to buy and sell this currency in offshore markets without much difficulty. Third reason for the currency being so popular is that this currency experiences very sharp and extreme fluctuations. And this fluctuation attracts investor’s attention making this currency a preferred choice amongst traders. Voluminous trading finally means more investments along with hedging. When we observe at US dollar or the Euro we realise that these are comparatively more stable as compared to GBP. Coming to the reason for fluctuations in GBP rate – it is because British economic norms have tightened a great deal and the pressure has lead to a shaky monetary system which reflects by way of rate fluctuation. GBP USD – An Overview: GBP USD is also many times referred to as the Cable by traders and investors. This Cable is a highly and vastly traded currency pair in the currency trading arena. And because it is so widely traded it is also counted amongst the most liquid and cash rich pairs that are traded against the US dollar. Liquidity proves to be a great help, and a necessity to be able to take the advantage of the price adjustments and variations. GBP USD pair has a wider price range when matched up to other currency pairs for a simple reason that it is highly impulsive and unpredictable that gives this pair its salient feature – volatility. And because of the sort of volatility that this pair gets associated with that under majority of situations and market’s trading environment, the pair receives higher spread quotation from brokers engaged in Forex trading. The GBP USD cross rate exchange is a currency pairs that makes for 85% of all of the currency cross rate trades happening at any point of time. When an investor is considering buying the GBP USD currency pair – what he/she is doing is – speculating on the British Pound- Sterling intensification or strengthening of GBP as against the US Dollar. And on the contrary if the investors are contemplating selling the GBP USD what they are speculating on is the British Pound/Sterling weakening against the US Dollar to able to win profits from the trade. According to the current Bank for International Settlements (BIS) survey released in the in the market, GBP USD is positioned at number three amid the most traded major currency pair comprising 14% share in the total daily trading size or volume. As the GBP USD is one of the most fickle, volatile, and unpredictable currency pairs, it also is known to raise many a false and bogus alarms, fake breakouts and wild movements. This is one of the main reasons that traders are often warned that unless he or she is an experienced currency trader and has seen several seasons in the trading market he should not even try trading this currency. Without meaning to sound discouraging it is advised that it will actually do an aspiring professional a lot of good if she/he doesn’t start her/his career as a Forex trader trading GBP USD. However, once the trader gains some experience in Forex, begins to understand the nuances of currency and their characteristics, including that of GBP and USD and their typical swings and moves taking the currency up or down, its peculiar reaction to economical and fundamental events, the way it forms trends and leanings in a live market etc, GBP USD, i.e. the Cable proves to be a reliable old friend. What deserves a special mention here is that this is not the only dependable pair around and that there are several other pairs almost equally reliable. GBP USD currency pair prefers large moves; it is capable of bringing more number of pips with the help of one simple move as compared to pairs such as EUR/USD or USD/JPY. This currency pair is also many a times used for engaging in breakout trading. However, it is for the trader to remind himself over and again about the risks associated with this pair increases in proportion to profit opportunities. Wider the Profit Opportunity Window means more is the risk proportion. GBP USD requires the stops to be placed further apart. The pair belongs to volatile category. Over and above this, there is sufficient market research & observations available for GBP USD that can be used by traders. This also makes the pair a chosen one. Characteristics of GBP USD Pair: The first characteristic of the pair is that the average broker spread comes to around 3-5 pips. Pair’s daily range averages to about 150-200 pips. The best time to trade GBP USD pair is during London session (0700 GMT – 1700 GMT). Since one of the currencies is Euro. The counter currency of GBP USD is US Dollar, and it is official currency of the US and US’ Trading happens in New York which is also the market where maximum number of trades happen, therefore the other potent trading hours logically would be the time when New Your Stock Market is open and live. Coming to factors affecting the GBP USD rate is the degree of difference in interest rate existing between the Bank of England (BoE) and the Federal Reserve High yield. Over and above, the growth probability in the UK also triggers GBP USD go higher. GBP USD as mentioned earlier is certainly not a pair for the novices. This fact is something that traders need to remember themselves as well as remind the new aspiring lot that they need not test these waters as yet. The pair comes with high spreads, wild fluctuations. Their wide price brackets and spikes are hurdles which may prove to be too much of a hurdle for a trader with little or no experience to tackle, and it will hardly be surprising he ends up losing money if he happens to be trading in the live environment. An experienced investor or trader, who has familiarity with both the currencies – GBP and USD, along with having a clear understanding of market economies, their strengths, weaknesses, triggers etc will be able to strike quite a few winning deals and book profits. Recommended trading style for this pair is either day trading or swing trading. So traders who have expertise in this style should sure consider this pair and study it thoroughly before testing the waters. There are different ways to trade this pair. For example, applying Technical Analysis and/or Analyzing Fundamental News from the UK and US zone helps to make GBP USD trading decisions much more accurate and easier and as a result more profitable. It will make great sense for investors / forex traders if they get into the habit of keeping a watch on false break outs and do not fall prey to such bogus alarms. Traders will also require keeping their mind and eyes open to unexpected economic news releases which is likely to make the GBP USD currency pair move too much in one direction without a lot of retracements. Structure of British Pound: Pound Sterling’s configuration has undergone changes several times. In the year 1971, system of decimalization was introduced and pound got divided or broken up into hundred equal pence. Earlier it took 240 pence to make pound sterling. Pence or penny as it is often referred to is symbolised by `p’ and is circulated as legal tender in coin format. The nine denominations in which these coins are available include 1 penny, 2, 5, 10, 20, 50 pence & 1, 2, 5 pounds. Coming to Pound Sterling currency notes, they have been used as legal tender as a mode of exchange for more than three hundred years. The notes are issued in denomination of 5,10, 20, and 50 pounds. Portraits of Elizabeth Fry, Sir Edward Elgar, Charles Darwin, and Sir John Houblon are printed on the reverse side of these notes, where as the up-side or the front of these notes carry portrait of Queen Elizabeth. Administration and responsibility of minting British Pound rests in the hands of the Royal mint. Another thing that needs special attention is that though BoE plays the role of central bank, printing is done by different banks for different notes. Printing is divided according to areas. Bank of England prints the English notes, Bank of Scotland, Royal bank of Scotland, Clydesdale bank, and First Trust Bank take care of Scottish notes, Northern Bank, Ulster Bank and Bank of Ireland print currency notes that are circulated in areas namely, Northern Ireland, States of Jersey, Isle of Man and so on. History of GBP: British pound sterling is the oldest currency in use introduced first by King Henry II in 1158. At that time coins that were in circulation were made of Silver. Silver was considered a precious metal. These silver coins were known as `Sceats’ then. The standard used as a measure for silver at that time was Tower Pounds that became Troy Pound later, which was valued higher than Tower Pound. This reason why Britain’s economy eventually got so badly hit by inflation was due to the supposed degradation that took place vis-à-vis the silver coins. These coins were in circulation at that time & the de-valued currency went on to affect the standing of the British economy as a whole. Several decades later in the year 1560-61, with an aim to tackle inflation which Britain was experiencing at that time, Elizabeth I and her team of economic advisors introduced a new currency and called it pound sterling. But as pound sterling became certified currency /legal tender within Britain, the perplexity and frenzy in the British economy reached its logical conclusion. Introduction of Pound Sterling was hailed and proved to be a good decision as it gained immediate acceptance and strength to stand on its own and serve as certified medium of exchange independently, without any outside support. Pound did what it was designed to do. It remained strong and stable and did not show any signs of being a fickle and loose currency even during the most critical and challenging economic environment. To the extent that even in the times of Civil wars the currency managed to display strength. It also stood its ground when the country implemented gold standards in the year 1816. By the time World War I was over, UK’s economy continued to grow in stability and strength, and went to acquire and possess approximately slightly less than half of the entire world market’s total investment abroad, outside the country. Once the war began it changed the entire economic scenario beyond other aspects and functioning, and even the most robust of economies started to display instability and fluctuations. The country decided to shift to gold standard which finally and officially was accepted and approved of during 1925. This new shift was initially objected upon, and people did not show the level of confidence that was required but eventually it was re-considered with a view to ensure that economy gets back on its feet and stabilizes. Then it was time was another crises that the country had to face. 1930 saw depression and witnessed a sharp turndown and devalued currency which was affected yet again, which at that point in time had already started to show some signs of recuperating. This decline was result of economic depression and it was more than visible and did manage to make its presence felt. After this whole phase was coming to an end, efforts of many kinds were made with an objective to strengthen the pound sterling. The revised system of decimalization was launched in 1971 which also got finally adopted. Factors Affecting the Exchange Rates – An Overview: There are many economic factors at universal level which come with varied extent of importance, in different parts of world economies on which precariousness and instability in the foreign exchange rates depend. Traders and economists are aware that there are exceptional factors having the power to influence the rates that could exist in specific countries because of their typical situation. A list has been compiled that focuses on causes which may give rise to fluctuations in foreign exchange rate. Some general factors on which the foreign exchange rate depends or could change include: The first major factor to influence rate of exchange in the GBP USD currency pair is current scenario of Import Export flow between US and Britain. Likewise another factor that can influence Exchange Rate of GBP USD is the Capital flow between America and Great Britain. Even the Rate of inflation could cause variation or bring volatility in the GBP USD currency pair. Exchange Rate Fluctuation limits set by governments of respective countries impacts it. Then there is Trade balance pertaining to goods, services and merchandise. Prevailing or ongoing Inflation Rate also impacts exchange rate of currencies in question within the Great Britain or US. To meet expenditure pertaining to buying stock or/and bond, the funds flow comes into action and this also goes a long way in fixing exchange rate of one currency against the other. Then the factor called the relative growth also plays an important role in fixing exchange rate. Exchange rate is also dependent on short as well as long term interest rate disparity. Exchange rte is also influenced by or affected by borrowing cost. If traders will take a serious note of the facts mentioned above, they will accept and be convinced about the fact while trading the GBP USD currency pair that market risk is going to exist no matter how and what they do, and whatever the economic environment at that point of time is. There is no such method or formula or situation that can guarantee to bring trading GBP USD risk to zero. Especially more so in this pair particularly because trading in GBP USD and involves reasonable risk and this pair is hardly suitable for all types of forex traders. Another thing to be noted about this pair is that the GBP USD currency pair trading happens in the cash market and not on any exchange. One more significant quality associated with this pair is that this currency pair’s past results or outcome has nothing to do, or no role to play when it comes to the future trading results. Traders should be careful and take care that they keep only risk capital aside that they can invest in GBP USD and would not regret losing it. In a nutshell, there are many factors like Export-Import flow, capital inflow, monetary supply, rising cost of living, rate of interest, Gross Domestic Product, Balance of Trade numbers, natural calamity, and political up and down swings leading to uncertainties, prices of commodity, especially so if the country depends on commodities like oil, metals, agriculture in a big way when it comes to the GDP – that could affect the GBP USD cross rate. What Is The Role of Balance-of-Payments Position In Currency Trading? It should be remembered by all the investors and traders irrespective of which currency pair they are interested in trading – is that the exchange rate for any foreign currency is based on a variety of factors hinting at economic and fiscal situation and environment in the country issuing the currency. Amongst the most important factors is the balance sheet standing of that nation. Let us discuss the balance of payment angle clearly. The balance-of-payments shortages quite often result in top price depreciation of a nation’s currency vis-à-vis the value of other currencies. A nation faces crises under many situations. If country has imported merchandize against which payments are due which it is not able to pay because it is running short of funds, then this is bad for economy of that country. When a nation faces deficit of funds like this with regard to its balance of payment it is an alarming economic situation. This kind of situation affects its home currency rate unfavourably. The explanation for this goes like this – to meet the deficit of funds the country may also have to sell some of its currency in the market to be able to make up for the shortfall. This dents the economy in a way that takes long to recuperate. Role of Inflation in Trading GBP USD or any Other Pair Inflation plays a very dominant role when it comes to impacting exchange rate of both, currency of the country as well as various currency pair combinations involving home currency. Suppose if Europe’s inflation rate is increased in comparison to inflation rate of US. In this situation Europe’s currency strength will take a hit. And if the situation is reversed, and if for some reason a country decides to bring down its inflation rate then this will have a favourable impact on value of its home currency. Same principal holds true when we talk about rate of Interest. Countries where high interest rates are applicable, home currencies of such countries are valued higher, compared to currencies of countries where interest rates are comparatively lower. Factors Affecting GBP USD (Cable): We shall start with Bank of England – which indisputably is the first factor which affects GBP USD currency pair. Let us take the discussion a little further to understand it more clearly. With an ultimate objective of attaining price stability, & extending support to government’s growth and employment policies, abiding by Bank of England Act of June 1997, the bank got itself the permission for the operational independence to devise monetary policy. The price stability objective is based on inflation target of the government, which is close to around 2.5% annual growth in RPI – Retail Prices Index that does not take mortgages into consideration (RPI-X). Therefore, in spite of the freedom and autonomy it enjoys in devising monetary policy, the bank finally depends on living up to the inflation target which is decided by the Treasury. The next factor affecting Cable after Bank of England is the Monetary Policy Committee: The Bank of England’s Committee is in charge and accountable for making interest rates related decisions. The Central Bank’s core interest rate is the base/ minimum lending rate which bank uses as a signal or indication to change monetary policy during first week of each month and this change in base rate has a significant impact on sterling. The Bank also defines monetary policy in association with its daily market operations. Bank finalizes, as well as makes amendments in its dealing rates at which it buys government bills from specialized institutions in trading money market instruments, from time to time. The third factor is gilts. The government bonds are also popularly called gilt-edged securities. Gilts influence significant changes in GBP USD currency pair too. The spread –between the yields on the ten-year gilt against the ten-year United States Treasury note is also an influencing factor for the exchange rate. Where, Spread signifies the extent of gap or disparity pertaining to yields. The same status between gilts vis-à-vis the German bonds is also critical, as it is responsible for making the EUR/GBP exchange rate swing this way or that, which in turn has an affect on GBP USD exchange rate depending on the trend of change. Then comes the 4th factor that affects GBP USD Exchange Rates and that is the 3-month Euro sterling Deposits’ interest. For calculating or arriving at interest rate differentials to help evaluate the exchange rates this one makes for also a perfect yardstick, or point of reference. When traders speak of these factors on theoretical backdrop, they are aware that larger the interest rate disparity in favor of the European and United State’s currency against the euro/sterling deposit – the more are the possibilities that the GBP USD could be in for a decline. However, while this could be a general assumption it should however be remembered that this equation may not hold the ground for every type of market environment. This is because more than one factor may exist in parallel. It’s a market and nothing can be said of it. No perfect predictions can be made here no matter how thorough our studies or observation or how vast our experience has been, or for that matter how much ever our efficient EA software may be guiding us. Then comes, next factor influencing the GBP USD exchange rates and that is the role of the Treasury in devising or defining the monetary policy to arrive at the cost of living index or inflation objective for the BoE and making key appointments at the Central Bank. Sterling and EMU Membership also affects GBP USD trend. The British Prime Minister’s speech, statements issued related to economic announcements and amendments, relief’s etc also impacts the sterling especially more so when some critical reference is made by the British prime Minister with regard to his country’s possible association with the single European currency, the euro. For Britain to be able to get associated with the single currency, on one hand interest rates of UK will have to come down at once and together to the Euro zone levels at the same time. If people/citizens of Britain decide to make their choice in favor of the euro, the sterling will experience a downturn against the euro to offset trade advantage in favor of Britain’s industrial arena. Any thing like firebrand and aggressive speeches, remarks on the polls signifying a closer UK to the euro, can have an adverse impact on sterling’s worth. Its time to discuss another factor called the Economic Data. This data comprises, the UK comprises the Claimant unemployment & unemployment rate; RPI-X; retail sales; balance of payments, average earnings; PPI; industrial production; GDP growth; purchasing managers’ surveys pertaining to manufacturing and services; money supply; & housing rates. This is also an important factor that has the power to sway the currency pair. 3-Month Euro Sterling Futures Contract, also popularly known as Short Sterling, has an important role when it comes to calculating exchange rate for GBP USD currency pair. The 3-Month Euro Sterling Futures Contract can be defined as the difference between futures contracts on the 3- month Euro Dollar & the Euro-Sterling deposits. Exchange rate of GBP USD pair is also sometimes influenced by fluctuations that take place between exchange rates of cross pairs; i.e. the non-dollar pairs’ exchange rates. Pairs like EUR/GBP etc. Another factor that can influence or shape exchange rate of GBP USD pair is Britain’s leading stock index, FTSE-100. Although Britain’s key stock index does not impact the currency too much, the favourable correlation equation that the FTSE-100 and the Dow Jones Industrial Index share does impact exchange rate to an extent. One more important observation that has been made and documented during crises situations is that while liquidity and technical feature do influence the performance of inflation-indexed markets, but these issues as seen in the past have not adversely affected the relationship between break out of financial or monetary news or market-based inflation expectations on a day to day basis. On the contrary observations and reports that the UK may not be inclined to become part of the single currency project can hurt the EUR/GBP, which in turn will go to boost the cable (GBP USD pair). GBP USD – The Perfect Trading Technique – a Myth: As trading generally takes place based on comparison of currency, it is simpler to trade GBP USD in any economic environment. GBP USD currency trading is preferred over other types of trading typically for the reason that it offers to minimize and reduce portfolio risk as it facilitates the scope to profit in both rising as well as falling markets. Keeping an eye on real time quotes, and reading through daily news & analyses pertaining to GBP & USD market and economies will help traders take informed trading decisions. Which means Formula is a myth. Access to Information and analytical skills is the reality. Relying on Automated Trading Expert is therefore a big huge myth. Traders can find all the systems and strategies along with information on the internet for free. Information about trading GBPSUD in various market conditions is available aplenty online. Finding and visiting a genuine, regularly updated blog, forum, or website run by an experienced trader is reality. The rest is myth. Daily signals etc unless it is coming from a certified source where trader has been an active member. Traders should also know that what one trader considers the BEST and MOST EFFECTIVE system may not hold true for another trader trading the same currency in same market environment. This is because every individual trader is different and their trading style is different, too. One more trading myth busted here and goes for a toss. No single formula buddy that can fit one and all! Not in GBP USD trading at least. The simplest logic is that we are discussing possibility of perfection in relation to the ever changing global market environment. Trader’s market is fickle, unpredictable, and volatile. It changes even at the slightest movement of any kind across the globe and may remain asleep when we are expecting the worst nightmare. All the markets of the world directly or indirectly impact price movement of its own currency. With so many forces to move the market – existence of one formula that will work under every situation does not arise. The sooner that trader takes stock of facts and accepts it, the faster he shifts to reality lane, it will prove better for him. It should be borne in mind at all times that all the traders who are successful today have had their share of downfall and failures and will continue to make wrong decisions and lose trades in this unpredictable and ever changing market conditions. And that is the only way that they will go on improving their learning curve. There is no other or better way to move up the trading ladder. But what differentiates a serious long terms trader from a casual trader, trading just for luck, lottery or lark, is that a serious trader never forgets to learn his lessons, especially from his losing trades. This keeps him grounded, close to reality, never really seeking a system, a robot, or a platform that will give him 100% winning trades all the time, because a wise trader knows that such a foolproof system never existed and never will. What an experienced trader is generally seen doing instead is that he uses several systems together. Learning and trying various systems and style to find something that he will feel in sync with his trading style and something that will suit his market conditions. All these factors and tools evaluated in relation to one another will help him to decide if he should enter a trade or not. Besides this a trader has his own system which is at work which he himself has devised and it based on his own experience and the market he focuses on. Besides using systems traders devise their own formulas and signals, they also watch news, study economic environments of Britain dn US because they know daily news does affect the market, and the systems they use can also be affected by it. After taking stock of facts about the systems he is using, studiying sell or buy signals closely, watching the news to verify what is going on in the currency market, will a smart trader make his decision. He can even take a step further and look at the 1 Hour, and 4 Hour chart to re-confirm if the trend is going in the same direction. After everything is in sync, she/he will enter/open a trade. People trading GBP USD like to use 1 hour time frame Indicator that they use is EMA 5 & EMA 13. When these two lines cross each other a trader knows it is time to enter/open a trade. EMA 14 is another indicator they use trading GBP USD, to close, and Bollinger Bands Period set to 20, Deviation 2, Shift 2 apply to close. Again, when EMA crosses the Bollinger Bands in middle, it’s a clear indication to them that its time to open a trade. The above two indicators discussed in the above example work 75% of the time especially if one is interested in booking profits between 20 pips to 60 pips, but as trader goes on trading and gaining experience & exposure in various markets, systems, robots, and situations, he will come across several other indicators that will help and strengthen their analyses skills to further confirm the position by reading the market that bit better focusing on cable. GBP USD – Concept of Midnight Trading: Midnight Trading is not a very common concept but it has clicked with traders doing GBP USD pair. Traders after having back tested and checking historical data at random found that midnight trading could work to their advantage. It has shown to have a 1:1 risk reward ratio and traders are attracted to it because they find it easy to use. Midnight trading of GBP USD currency pair was found suitable for any trading system in Fifteen-Minute timeframe. The Entry rules for GBP USD midnight trading are several – like for example, midnight trading pattern should be based on the closing of the first Fifteen-M bar past midnight based on GMT on the GBP USD pair. If GBP USD Traders decide to follow GMT time zone and close the price of first Fifteen-Minute Bar, past midnight, the moves are more likely to work in their favour than go against them. Placing a buy stop order 50 points above the close and placing sell stop order 50 points lower than the close will likewise prove to be a profitable strategy. As traders get into midnight trading, they should understand that it’s a serious business and that there are entry and exit rules related to this kind of trading which need to be religiously followed. Ideal situation for a trader would be to place orders at 20 point stop loss and 20 point limit order. This strategy will improve his chances of booking profits. Once the trader notices one of the orders gaining momentum, he should just go ahead and cancel the other order. Similarly strategy can be implemented for exit strategy also, where the trader places stop loss of 20 pips and takes profit of 20 pips. Some of the advantages of Midnight trading are that the method is rather simple to use and is most appropriate for people who have no problem staying up late in the night. Plus in this type of trading, there is availability of data which helps traders to get a better insight into realities of midnight trading. 7 Questions to Ask Yourself Before Trading GBP USD: - Find out the present market Sentiment in GBP USD - Identify the immediate Strongest Resistance for GBP USD - Identify the immediate Strongest Support for GBP USD - Check out consequences of a day pair closing below the certain expected level - Identify an ideal position for taking Short Position - Identify position for taking Long Position? - What will be trader’s action plan if stop loss is triggered for long position and what would be the next step? What Makes the GBP USD a Preferred Pair among Traders? Before United States of America became a Super Power, it was Europe that controlled and lead the international economic scene. When Europe was leading, GBP was considered a reserve currency. However World War I and II changed many things in many ways for many economies. From this crises, as America emerged the next super power, and US dollar became the next reserve currency. U.K.’s growth declined because of government’s rigid and non-flexible regulation and the labour market scene. In spite of it, United Kingdom’s economy managed to maintain its strength and continued to prosper. Its currency also remained stable and has played an important role in the global financial markets; though USD is the reserve currency, pound still happens to be seen as an important currency amongst traders. This is also one of the reasons why traders choose to trade it against the U.S. dollar. GBP USD has remained popular mainly because of the volume it traders, which finally leads to the liquidity it offers to traders. Traders go after this pair also because of the tight bid-ask spreads that the pair offers. Then third important reason for its popularity is the absence of problems arising out of arbitrage. Meaning, there is no scope for traders where they can buy and sell the pair simultaneously to profit from a difference in the price. Understanding & Benefiting From Co-relation of Currency Pairs: To become a winner at Forex, one’s insight into portfolio’s sensitivity vis-à-vis market movement and volatility is crucial. This sounds particularly relevant when one is trading currency, because currencies are priced in set of twos’ called pairs, and the investors have to understand that no matter what the market condition is – it is not possible for any single currency of the currency pair to get traded independent of the other. Once a trader becomes aware of these interdependence intricacies and correlations and how one is likely to impact the other, and once he understands how situations can become absolutely different as market takes a sudden turn, shot, sway, or a dip – a trader will feel more in control and sync which will help to make the best use of correlation concept. Since the Swiss Franc, Euro, and the British pound Sterling share a positive/favorable vibe or correlation with each other the result is that EURO/USD currency pairs develops a positive leaning with our pair. On the other hand GBP USD shares a negative leaning or correlation with the USD/CHF. Regardless of trader’s trading style or strategy and irrespective of whether he is looking to branch out or expand his positions or find alternate or more pairs of similar nature to leverage the view, it is important to remember the correlation that exists between various currency sets or currency pairs and their ever changing movements and leanings. You can find all relevant FAQ in regards to the above article here fxkeys/gbp-usd-how-to-trade-gbpusd-wisely-and-properly/
Posted on: Sun, 31 Aug 2014 08:30:57 +0000
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